The U.S. dollar and stocks made a fantastic run towards the end of last week after the Senate on Thursday voted to pass a budget resolution for 2018. The vote was interpreted as a first step towards paving the way for tax reforms. Investors will require a confirmation from the House which needs approving the budget resolution in order to put a detailed tax reform legislation. Although we might continue to see hurdles in the weeks to come, Republicans will put all their efforts to pass a tax reform package as it is considered the most critical element for 2018 midterm elections.
Investors will likely continue ignoring overstretched valuations and keep driving equities higher for the remainder of the year if they believe fiscal reforms will be implemented soon. However, it remains to be seen how the Federal Reserve will respond to fiscal changes. I think this would to some extent depend on who will Chair the Fed for the next four years. According to the betting firm PredictIt, Jerome Powell is taking the lead, and if proved to be true and got elected in February next year, the trajectory of tightening monetary policy will remain very gradual. Thus the bull market will still have legs, but he will not be the best candidate for the U.S. dollar.
Friday’s GDP figure is expected to show the U.S. economy grew 2.6% in the third quarter vs. 3.1% in Q2. Given that hurricanes Harvey and Irma may create some noise in the data, it will be considered as temporary and will likely be shrugged off by investors.
ECB’s quantitative easing future
Thursday’s European Central Bank meeting is expected to be the main risk event of the week, especially for Euro traders. EURUSD traded within a tight range of 130 pips during last week, and this should not be a surprise ahead of such a significant meeting. The key questions traders need an answer for is 1. By how much monthly purchases of assets will be reduced in 2018? and 2. What is the duration of the amended QE? Markets are expecting asset purchases will be cut in half to around 30 billion euro. However, the duration will likely have more impact on the direction of the single currency. If Mr. Draghi signaled that QE might continue running beyond December 2018 if needed, it would be interpreted as a dovish taper, thus pushing further expectations for a rate hike and drags the Euro lower.
Bitcoin smashing new highs
Bitcoin has become an asset hard to ignore. Despite the many warnings from the likes of JP Morgan’s CEO Jamie Dimon, Nobel Prize Winner Robert Shiller, and former Fed Chair Ben Bernanke, the cryptocurrency continues to outperform all asset classes. On Friday bitcoin broke another key psychological level of $6,000 to post a new high on Saturday of $6,180. There’s no doubt that it has become the most crowded trade in 2017, and the risks of jumping into the trade now are very high. This is just to say that bitcoin trading is not for the faint-hearted. However, when looking at the charts, after every break of new high Bitcoin price rallied incredibly. For instance, when Bitcoin broke above $2,980 in early August the price surged 67% to $4,980 in 29 trading days. In April we saw a similar reaction when a high record high was broken, and the price rallied 120%. If such pattern continues then $8,000 may be the next target bulls are looking for.